1. The opportunity cost of holding assets as money Suppose you've just inherited $10,000 from a relative. You're trying to decide whether to put the $10,000 in a non-interest-bearing account so that you can use it whenever you want (that is, hold it as money) or to use it to buy a U.S. Treasury bond. The opportunity cost of holding the inheritance as money depends on the interest rate on the bond. For each of the interest rates in the following table, compute the opportunity cost of holding the $10,000 as money. Interest Rate on Government Bond Opportunity Cost (Percent) (Dollars per year) 3.

1. The opportunity cost of holding assets as money Suppose you've just inherited $10,000 from a relative. You're trying to decide whether to put the $10,000 in a non-interest-bearing account so that you can use it whenever you want (that is, hold it as money) or to use it to buy a U.S. Treasury bond. The opportunity cost of holding the inheritance as money depends on the interest rate on the bond. For each of the interest rates in the following table, compute the opportunity cost of holding the $10,000 as money. Interest Rate on Government Bond Opportunity Cost (Percent) (Dollars per year) 3.

ENGR.ECONOMIC ANALYSIS

14th Edition

ISBN:9780190931919

Author:NEWNAN

Publisher:NEWNAN

Chapter1: Making Economics Decisions

Section: Chapter Questions

Problem 1QTC

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Tools 1. The opportunity cost of holding money Suppose you've just inherited $5,000 from a relative. You're trying to decide whether to put the $5,000 in a non-interest-bearing account so that you can use it whenever you want (that is, hold it as money) or to use it to buy a U.S. Treasury bond. The opportunity cost of holding the inheritance as money depends on the interest rate on the bond. For each of the interest rates in the following table, compute the opportunity cost of holding the $5,000 as money. Interest Rate on Government Bond Opportunity Cost (Dollars per year) (Percent) What does the previous analysis suggest about the market for money? The quantity of money demanded increases as the interest rate falls. The quantity of money demanded decreases as the interest rate falls. O The supply of money is independent of the interest rate.
3. Suppose you are looking to buy a bond that promises to pay $600,000 on the date of maturity in one year. A. If you bid for the bond and wind up paying a price of $590,000, solve for the interest rate on this bond. Round your answer to four decimal places. b. If on the next day, you bid for the bond and pay a price of $575,000, solve for the interest rate on the bond now. Round your answer to four decimal places. C. What is the relationship between the bond price and the interest rate on the bond?
Suppose that the interest rate is 5 percent. Enter your answers rounded to 2 decimal places. A. What is the future value of $100 four years from now? $ How much of the future value is total interest? $ b. By how much would total interest be greater at an interest rate of 7 percent than at an interest rate of 5 percent? $
1. Financial institutions in the U.S. economy Suppose Clinton decides to use $1,000 currently held as savings to make a financial investment. One method of making a financial investment is the purchase of stock or bonds from a private company. 1. Suppose Warm Breeze, a cloud computing firm, is selling bonds to raise money for a new lab. This practice is called finance. Buying a bond issued by Warm Breeze would give Clinton (an IOU, or promise to pay/ a claim to partial ownership in) the firm. In the event that Warm Breeze runs into financial difficulty, (the stockholders/ Clinton and the other bondholders) will be paid first. 2. Which of the following statements are correct? Check all that apply. - The price of his shares will rise if Warm Breeze issues additional shares of stock. - The Dow Jones Industrial Average is an example of a stock exchange where he can purchase Warm Breeze stock. - Expectations of a recession that will reduce economywide corporate profits will likely…
Tom and Sue had W-2 earnings of $100,000 last year. They deposited $5,000 into each of their IRAs from money that was in their checking account. They also sold their five year old car for $1,000 less than it was worth. Due to a slow down in the housing market, the value of their home decreased by $25,000. What is their change in net worth? a. No change b. Minus $19,000 c. Minus $26,000 d. Plus $9,000 e. Plus $74,000
10. What is the present value of a perpetuity of $100 if the appropriate discount rate is 7%? If interest rates in general were to double and the appropriate discount rate rose to 14%, what would happen to the present value of the perpetuity?
3. According to an article on the junk bond market in Europe published in the Economist in 2016, "The spread (the interest premium over government borrowing rates) paid by junk-bond issuers has risen by nearly three-and-a-half percentage points since March last year." (a) How can you tell whether a newly issued bond is a junk bond? (b) Why would the spread between government bonds and junk bonds have been rising? (c) Does this increase in the spread make junk bonds a better or a worse investment compared with buying government-issued bonds? Briefly explain.
1. The opportunity cost of holding money Suppose you've just inherited $10,000 from a relative. You're trying to decide whether to put the $10,000 in a non-interest-bearing account so that you can use it whenever you want (that is, hold it as money) or to use it to buy a U.S. Treasury bond. The opportunity cost of holding the inheritance as money depends on the interest rate on the bond. For each of the interest rates in the following table, compute the opportunity cost of holding the $10,000 as money. Interest Rate on Government Bond Opportunity Cost (Dollars per year) (Percent) 10 What does the previous analysis suggest about the market for money? The quantity of money demanded increases as the interest rate rises. The quantity of money demanded decreases as the interest rate rises. The supply of money is independent of the interest rate.
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1. Assuming that the current interest rate is 3 percent, compute the present value (or price) of a five-year, 5 percent coupon bond with a face value of $1,000. What happens to the present value when the interest rate goes to 4 percent? Compute the new present value.
Homework ( Suppose you've just inherited $10,000 from a relative. You're trying to decide whether to put the $10,000 in a non-interest-bearing account so that you can use it whenever you want (that is, hold it as money) or to use it to buy a U.S. Treasury bond. The opportunity cost of holding the inheritance as money depends on the interest rate on the bond. For each of the interest rates in the following table, compute the opportunity cost of holding the $10,000 as money. Interest Rate on Government Bond Opportunity Cost (Dollars per year) (Percent) 8 10 What does the previous analysis suggest about the market for money? O The quantity of money demanded decreases as the interest rate rises. The supply of money is independent of the interest rate. O The quantity of money demanded increases as the interest rate rises. G H 1 O 4
2. The opportunity cost of holding assets as money Suppose you've just inherited $10,000 from a relative. You're trying to decide whether to put the $10,000 in a non-interest-bearing account so that you can use it whenever you want (that is, hold it as money) or to use it to buy Government of Canada securities. The opportunity cost of holding the inheritance as money depends on the interest rate on the bond. For each of the interest rates in the following table, compute the opportunity cost of holding the $10,000 as money. Interest Rate on Government Securities Opportunity Cost (Dollars per year) (Percent) 8 10 What does the previous analysis suggest about the market for money? the interest rate rises. The quantity of money demanded increases O The supply of money is independent of the interest rate.. O The quantity of money demanded decreases as the interest rate rises.